How to Value a Healthcare Company

Issue 10, Volume 20, September 26, 2023

If you're thinking about selling your healthcare business, one of the questions you're probably most interested in getting answered is: "What is the value of my company?" That is one of the most common and early questions we at VERTESS get asked by clients.

Our initial answer? It depends. That will always be our first answer, as frustrating as it is for clients to hear. The truth is there's no way to confidently answer this question before we gather the information necessary to provide an accurate figure.

Think about selling your house. The real value is only determined after assessing issues like its location, size, age, special features, and what has sold recently in your market that is similar to your home.

Here are some of the most important factors for accurately determining an estimated market value for healthcare companies.

1. Your financial health

To establish a valuation, we must know your revenue and profit margin. These are often the pieces of information we request first from clients, along with some other key financial details. There are several reasons why:

• Buyers are initially looking at your revenue size to determine if you are big enough as a platform or if your company will be an add-on to one of their platforms (or larger companies). The larger your revenue, the more likely it is that you'll get the higher end of your valuation range.
• Your profit margin determines how much cash is generated each year from your company's operations and helps determine how long it will take the buyer to recoup an investment. Banks will also look at this margin when determining how much debt they will approve for the buyer. Conversely, if your profit margin is too big, a buyer might suspect that margin is not sustainable, and you may not be appropriately investing in staff, infrastructure, or other key facets for long-term business growth.
• Expenses as a percentage of revenue is also considered. Buyers want to know what your major expenses are and if they are in line with industry standards. Similar to your profit margin, if you're not spending enough on staffing and infrastructure, that can raise concerns.
•  A diverse and predictable payor mix can help strengthen your value. This is because there is less risk if one contract/payor is lost as you will still have other funding streams. Diversity can also be reflected by providing services in multiple locations/states or providing different types of services. Once again, such diversity creates some insulation against business disruption.

2. Tenure of staff.

The tenure of a company's staff generally helps strengthen valuation and offers from buyers. Most healthcare companies are struggling to hire and retain staff. If you can show employment longevity, employee satisfaction, and the ability to effectively hire, these can be value-adds for buyers.

Additionally, most buyers would like to see that the company will continue to thrive without an owner's leadership. Showing them a mature management staff that can take over following your exit is important. This will increase your buyer pool since many buyers want to see that strong leadership will remain in place post-transaction before making an investment.

3. Quality of your services.

This factor, as illustrated through data and satisfaction survey results, can also be a gamechanger. One of our jobs at VERTESS is to help sellers tangibly highlight the amazing qualities of their organizations. It is helpful to show quality assurance data and other information that can quantify the strengths of the services you provide and the people delivering them.

4. Location.

The state(s) you operate in can play into your value. This is largely based on factors like local reimbursement rates, availability of staff to hire at an affordable rate, and the friendliness of that state for running a business. I have heard from buyers that there are a handful of states they will not work in because of one or more of these factors. Such a perspective can limit a buyer pool, which in turn will reduce the number of offers that can drive up your sales price. Location is not a deal killer, but when it's not viewed positively by buyers, more work may be required to find the right buyer willing to pay a fair price.

5. Industry.

This is a moving target. We frequently see the pendulum swing based on the industries private equity firms are most excited about. A few years ago, applied behavioral analysis (ABA) service providers were rumored to be selling in the double digits, while intellectual or developmental disability (I/DD) provider organizations were generally trading at a multiple between 4.5x and 7x of their adjusted EBITDA. Today, we're seeing ABA services trading closer to where I/DD services are falling. Again, a company's valuation greatly depends on the factors discussed earlier, and some companies in these sectors can still achieve double-digit multiples, but it's not the norm. 

Want to Learn What Your Healthcare Company Is Worth?

Within healthcare, we see companies trading at an average between 5x and 7x their adjusted EBITDA. Your company could end up over, under, or between this range. Where you fall will vary greatly based on the many aspects of your company, including those key factors identified above. Finding out what your company is worth is complex and cannot be determined by filling out a form. It takes skilled healthcare M+A advisors, like those with VERTESS who are knowledgeable about your industry and have their finger on the pulse of transaction activity, to help you determine the value of your company.

If you're thinking about selling your company and want to know what it's worth or want to learn what you can do to better position your business for a future sale and possibly a higher sales price, reach out to me (my contact information is below) or any other VERTESS advisor. We'd love to speak with you and find out how we can help you achieve a successful sale!